The Federal Reserve should toughen oversight of big banks such as Goldman Sachs and JPMorgan Chase due to their negative influence over commodities, including the aluminum in beer cans, brewer MillerCoors will urge on Tuesday.
The maker of popular beers Coors Light and Miller High Life will tell the Senate Banking Committee that financial groups, through their ownership of warehouses, are distorting the aluminum market by controlling how much aluminum flows out of their storage facilities, leading to extra rent and other costs for industrial companies.
Tim Weiner, MillerCoors global risk manager of commodities and metals, said in prepared remarks that rules exploited by banks and other warehouse owners have cost his company tens of millions of dollars in recent years as a result of an "economic anomaly in the aluminum and other base metal markets."
The alleged gaming has cost aluminum purchasers overall an extra $3 billion, an expense that likely has been passed on to beer and soda drinkers.
The beverage company's statement comes as regulators at the Fed and the Commodity Futures Trading Commission weigh possible action against the banks for their commodities activities. The Fed is revisiting a landmark 2003 decision that for the first time allowed banks to enter the physical commodities business, the central bank said Friday. The CFTC is probing the metals warehousing business, the source of MillerCoors's complaints, people familiar with the matter said.
The inquiries could lead to full-blown investigations by the CFTC or a Fed ban on certain activities by banks in markets for commodities such as aluminum and oil, curtailing a key source of profit.
Ten major global banks have generated nearly $50 billion in revenue off their commodities business over the last five years, according to Coalition, a financial data provider. JPMorgan, Goldman and Morgan Stanley last year were the top three global banks in commodities revenue, with the 10 leading institutions generating about $6 billion in revenue off commodities activities.
The odds of additional regulatory and Congressional scrutiny likely have increased as MillerCoors and other so-called "end users" begin to publicly criticize financial companies and their regulators for inaction, experts said. Industrial companies such as manufacturers have long held a special status in Washington when it comes to financial regulation, successfully winning exemptions from certain rules by lobbying regulatory agencies and empathetic members of Congress.
"The potential impact on the debate by actual major end-users could be extremely significant and helpful," said Dennis Kelleher, president and chief executive of Better Markets, a Washington nonprofit group advocating for stricter oversight of large financial institutions. "The financial industry is supposed to be in service to the real economy. When that's not true, people pay attention."
In an example of the power end-users wield in Washington, Gary Gensler, CFTC chairman, said in February that his agency had implemented key reforms governing types of derivatives known as swaps "with an eye toward ensuring that the swaps market works for end-users, America’s primary job-providers."
"It’s the end-users in the non-financial side of our economy that provide 94 percent of private sector jobs," Gensler added.
MillerCoors is part of a loose coalition of end-users that include beer brewers, automakers, Boeing, Coca-Cola, Dr. Pepper Snapple Group and Reynolds Consumer Products that has accused big banks, including Goldman and JPMorgan, of anti-competitive behavior in the aluminum market. The complaints have prompted investigations in the U.S. and in Europe as regulators and policymakers debate the extent to which financial companies should be allowed involvement in physical commodities.
In addition to Fed and CFTC reviews, the allegations have prompted a Senate probe into Wall Street's expansion into the commodities business as an increasing number of companies claim that the broader economy is being hurt by banks using important raw materials to boost their own profits.
In the past, big banks have been accused of distorting oil and food prices after the price of related commodities hit record highs. But the most recent accusations center on an obscure part of the aluminum business involving an exchange based in London and its effect on the movement of aluminum stocks.
The London Metal Exchange, or LME, sets the rules for the minimum amount of aluminum that warehouses in its network can deliver to customers, such as MillerCoors. The metal could be immediately used for items such as beer cans. Customers also may want to move the metal out of a certain warehouse simply to fulfill a contract struck through the LME.
Goldman controls most of the aluminum stock in North America that is traded on the LME through the bank's ownership of Metro International Trade Services, according to LME data and MillerCoors. JPMorgan is another big owner of LME-authorized aluminum warehouses. Banks including JPMorgan also help set LME rules.
Critics argue that the LME minimum acts as a maximum, as warehouses limit the amount of metal they move out of their storage facilities to maximize the rent they collect from investors and other groups that own the aluminum. That has led to increasing costs for companies such as MillerCoors, and a record premium for physical aluminum beyond the prices agreed between parties on the LME.
Companies such as MillerCoors claim that banks and other owners of warehouses are hurting industrial companies and other users of aluminum by effectively hoarding the metal at their facilities.
Weiner said in prepared remarks:
The Federal Reserve has the authority to decide whether commercial and physical commodity activities like the LME warehouses are appropriate lines of businesses. Under this Federal Reserve exemption, U.S. bank holding companies have effective control of the LME, and they have created a bottleneck which limits the supply of aluminum. Aluminum prices in general and for can sheet in particular have remained inflated relative to the massive oversupply and record production. What’s supposed to happen under these economic conditions? When supplies rise while demand is flat to down, prices should fall.
Instead, what’s happening is that the aluminum we are purchasing is being held up in warehouses controlled and owned by U.S. bank holding companies, who are members of the LME, and set the rules for their own warehouses. These bank holding companies are slowing the load-out of physical aluminum from these warehouses to ensure that they receive increased rent for an extended period time. Aluminum users like MillerCoors are being forced to wait in some cases over 18 months to take physical delivery due to the LME warehouse practices or pay the high physical premium to get aluminum today. This does not happen with any of the other commodities we purchase. When we buy barley we receive prompt delivery, the same with corn, natural gas and other commodities. It is only with aluminum purchased through the LME that our property is held for an extraordinary period of time, with the penalty of paying additional rent and premiums to the warehouse owners, until we get access to the metal we have purchased.
Representatives for JPMorgan and the Fed declined to comment. A Goldman spokesman did not respond to a request for comment.